How Should Startups Spend Money? | Bolt Picks

Plenty of startups die when they run out of money. So how should a startup spend its cash, and what should the priorities look like at the early stage versus Series A? Recently, four Y Combinator partners — Brad Flora, Nicolas Dessaigne, Gustaf Alströmer, and Pete Koomen — sat down for a deep dive into exactly this: common spending mistakes, how to hire, and more. They've not only witnessed countless startup journeys as YC partners but have also lived through the grind themselves as founders. We've translated and edited excerpts from their conversation; the original video is linked at the end.

🔍 Key Takeaways

1. Stage-specific capital strategy: At the earliest stage (pre-seed), spend only on absolute necessities. Post-seed, prioritize hiring key engineers. After Series A, focus on measurable-ROI spending (e.g., sales teams). The core purpose of capital is to buy time to find product-market fit.

2. Founders must do the work themselves: Before product-market fit is validated, founders need to personally handle sales, marketing, and customer support. Avoid outsourcing core functions too early. Face customer feedback directly to iterate.

3. Avoid overspending and fake needs: Beware of copying big-company structures or hiring on linear-growth assumptions. Stay lean to pivot faster. Runway matters more than surface-level scale.

4. The double-edged sword of advertising: Early ads can mask true demand and cap growth. Only allow small experimental tests or ads with clear ROI. When you stop relying on ads, you can explore more direct customer acquisition methods.

5. Transparency and financial discipline: Regularly update investors on capital usage, retention, and other core metrics. Separate accounts to create urgency. Avoid irrational expansion. Financial discipline determines survival.

6. The essence of startups: Stay focused on the one mission: finding product-market fit. No need to replicate big-company functions. Success depends on real revenue quality (e.g., retention), not vanity metrics (headcount, press coverage).

Image: Interview show notes

I. The Logic of Startup Spending

• For a company just getting started, the logic for using capital should be extremely simple: money goes only to what's absolutely necessary.
• At the seed stage (typically raising roughly $500K–$2M), you need to hire 1–2 engineers — ideally people you've worked with before, or collaborated with on work or school projects — and convince them to join. That's your core team. As for other roles, you generally don't need many full-time employees early on; most work can be outsourced.

II. Hiring Mistakes Startups Make

• No one understands the product better than the founders, so founders should do sales themselves. Same for marketing — founders know the market, the customers, and the ideal customer profile well enough to make a real difference. Don't hire sales or marketing people before you've found product-market fit.
• The risk of having enough funding is that you might hire people to do things the founder doesn't like doing. If a founder dislikes something, it's probably because they're not good at it — and the person they hire likely won't be good at it either. So founders have to learn these things themselves.

III. Key Principles of Capital Management

• Say a founder raises $2M but hasn't found PMF yet. Maybe they're at $10K in revenue, still trying to figure out if users are sticking around. In that situation, the money in the bank is there to buy time to find PMF.
• When you raise funding, you can experiment more. If something works, you have more shots at raising again. Don't wait until you only have 12–14 months of runway left to start fundraising. Test the waters early; if it doesn't go well, you still have time to adjust.
• Many founders overspend, usually because they haven't yet found their real customers or confirmed whether people actually need their product. So instead of adjusting strategy or getting more customer feedback, they double down.
• Two methods to help startups manage money more frugally and with more discipline: 1) Report progress to investors monthly — having someone regularly check your spending forces discipline; 2) Open two bank accounts, put half the money in the second one, and pretend it doesn't exist.
• For companies that have raised a Series A and found PMF (typically $8M–$10M in funding), you can consider hiring sales — specifics vary by company. The key is ensuring every new hire generates additional revenue, not just adds expense.
• Even post-Series A, this doesn't mean you can make unrealistic investments — like buying giant billboards or overspending.
• When hiring, consider designing a framework to gauge whether employees are overwhelmed by workload. This might show up as engineers unable to keep systems running, sales unable to handle too many customer demands, or similar issues in customer support. Founders need to monitor employee status and decide whether to add headcount. Usually by the time problems surface, it's already late — and you can't hire one person to instantly fix everything. Understanding team workload also helps founders map the trajectory of that function, which serves as a reference for other roles.

IV. Stay Transparent

• Maintain transparent communication with all stakeholders, especially those who help keep you accountable. When you have plenty of capital and things are going smoothly, spending becomes easy — and without care, you can burn money in the wrong places.
• Not all investors give good advice; some may push you to overspend.
• The idea that "I can win by outspending the competition" usually doesn't work.
• When sales are going well and revenue is growing, founders easily overlook user retention. Rapid growth and cash flowing in make churn easy to ignore. This typically surfaces one to two years later, by which point the founder may have already spent heavily on growth and marketing — generating "low-quality" revenue.
• Distinguish high-quality revenue from low-quality revenue. Companies with high-quality revenue keep growing.
• Startups often stand out by doing customer support better than big companies. So startups must outperform large companies on support. Another function of customer support is getting real customer feedback. What do customers like? What feedback do they give? For a long time, founders should play the customer support role themselves. At some point you may not be able to reply to every email personally, but you should at least be involved in the content. Stay on top of what the support team is doing and review their feedback. Use automation tools to summarize work and extract key information.

V. Common Mistakes in Saving and Spending

• Saving too aggressively — like living in terrible conditions so you can't rest or focus — is saving done wrong.
• Spending on advertising: while some approaches may be smart, whether you need ads at all depends on your stage, specific situation, and goals. Ads are tempting. Spend some money, know you're getting exposure, maybe land a customer or lead. But this is essentially outsourcing your understanding of the customer. Especially early on, customers acquired through ads don't teach founders anything — or worse, ads become addictive. You spend on ads, growth accelerates, and you start expecting that growth to continue even when the foundation isn't solid. Eventually you burn through your cash — say you raised $2M and keep spending because you need to show growth numbers to investors. But you don't talk about churn or what's not working. You hit a wall, and the only solution is to raise more, but by then no one wants to invest.
• Ad spending falls into two categories: experimental ads with small amounts, and ads with positive ROI — these have clear payback periods, and every month you know exactly how returns look and how long it takes to earn back the investment.
• If founders spend heavily on ads early, they miss the opportunity to learn more efficient customer acquisition methods. When the ad spending stops, they don't know what to do.

VI. A Startup Is Not a Miniature Big Company

• A startup is not a miniature version of a big company. The departments and functions that exist in large companies aren't necessarily needed in startups. In fact, many roles that exist in big companies have no equivalent in startups. A startup's core goal is finding product-market fit. Every dollar and every ounce of energy raised should be focused on finding product-market fit. Until that's achieved, nothing else matters.
• A common mistake, driven by pressure from others' expectations or by studying big companies when you don't know what to do, is unconsciously drifting toward how large companies operate — imitating them without even realizing it.
• Looking at what big companies do, thinking that if you have those things you'll look more mature, and hiring functions and people you don't actually need. Much of this is just to make yourself feel better, not necessarily to improve efficiency.
• Many startups tend to discuss attributes similar to big companies. If you go to startup events or parties, people ask: "How many employees do you have?" or "Who are your investors?" They don't ask: "What's your retention rate?" or "What's your net revenue retention?" Those two metrics are what you should actually be discussing to show growth and impact.
• Be wary of the "fake it till you make it" mindset. When you read about other companies' funding news and team structures, you might think: if my team looks like theirs, maybe I'll succeed in my next round too.
• A common error: after raising a seed round, thinking "I need to last 24 months," dividing your cash by 24, and setting a monthly limit. That's wrong. You should actually stay lean, stay focused on finding PMF, and only consider spending more when you see PMF signals — because that's when you'll know how to spend.

📮 Further Reading

Linear Bolt Bolt is an investment initiative by Linear Capital dedicated to early-stage, global-market-facing AI applications. It carries forward Linear's investment philosophy, focusing on technology-driven transformation, with the goal of helping founders find the shortest path to their objectives. Whether in speed of action or investment approach, Bolt's commitment is lighter, faster, and more flexible. In 2024, Bolt invested in 11 AI application projects including Final Round, Xinguang, Cathoven, Xbuddy, and Midreal.